Business Owners May See More Deductions on Personal Taxes

By: Nicole Odeh 

When it comes to taxes, one rarely thinks of them as coming with free money. For some business owners, however, that is what may be happening with the Qualified Business Income (QBI) deduction that can now be taken following the passage of the Tax Cuts and Jobs Act.

This is a new deduction for owners of pass-through entities (S-corporations, partnerships, sole proprietors, trusts, or estates). The deduction is generally calculated as 20% of net income and it is applied against your personal taxes.

The QBI deduction is going to be a big change for many, but it is not something that has received a great deal of press. This makes sense as other provisions in the Act, such as the increased standard deduction and child tax credit, are things that nearly everyone will at least need to look at when it comes time to file their taxes. This QBI deduction will affect fewer people, but a deduction of 20% of net business income could drastically change what a return looks like.

There are threshold amounts for how this deduction can be applied, but it will still be able to be applied for many small business owners. If the owner’s taxable income is under $315,000 (MHJ) or $157,500 (all other filing statuses) before the deduction, the full 20% may apply. If the owner’s income is between $315,000 and $415,000 (MFJ) or between $157,500 and $207,500 (all others), the deduction may be phased out, depending on the business activity.

As always, there are rules – like caps for how much this deduction can be, based on how much income you earned during the year. But even so, remember that this is essentially a personal bonus for operating a business – and that is something you certainly did not have before!

Let this no longer be a silent tax provision and be sure it is something you look at as we enter tax filing season

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